MPC rate slows over N200bn capital raise by corporates

Indications are beginning to emerge that most corporate entities may not continue with their planned debt capital raise this year, in the face of the current monetary policy rate at 14 per cent and treasury bills which hover around 18 to 19 per cent.

Penultimate weekend, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, was quoted as saying, the bank would be failing in one of its key mandates if it cuts the Monetary Policy Rate (MPR) at this time.

The comment by Emefiele, which came before the CBN’s 257th MPC meeting, signals the likely position of the bank for the foreseeable future, perhaps, till full year 2017.

The lull in the equity market in the last few years has paralysed equity capital raising exercise in the capital market.

There was an expert consensus by the second half of 2016 that the macro-economic challenges in the country as well as the level of depreciation suffered by the nation’s currency, will compel more commercial banks to seek for avenues to beef their capital in 2017.

A Lagos-based investment and research firm, CSL Stockbrokers Limited, in one of its reports highlighted the importance of raising the funds as it is expected to enable the financial institutions withstand any shock in the industry as well as to remain above the regulatory threshold.

Capital adequacy is a persistent issue for a number of Nigerian banks. Regulatory capital ratios have been impacted by the large depreciation of the naira given the extent of dollar lending in the sector. They have also been hit by the sharp rise in impairments (implying little or no retained earnings).

The Central Bank of Nigeria (CBN) requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15 per cent while banks without international subsidiaries maintain a CAR of 10 per cent. The minimum requirement for systemically important banks (effective July this year) is 16 per cent.

About 10 companies have got their shareholders’ nod to raise N200 billion before the end of the year, 2017, while four firms have successfully floated about N7.2 billion from January to June 2017.

Researchers at the FSDH had noted last month that, the recent rally in the equity market has opened a window for the quoted companies to raise equity capital to finance their expansion projects, and that the bearish trends that dominated the equity market in the last few years have caused many companies to abandon the market as a source of raising long-term capital.

The Nigerian Stock Exchange All Share Index (NSEASI), which measures the performance of the equity market, appreciated by 20% between March 06, 2017 and May 31, 2017.

The expert at the FSDH were of the opinion that the factors responsible for the appreciation in the equity market include the improvement in the Q1, 2017 results of quoted companies compared with the corresponding period of last year and the prospect of better performance in subsequent quarters.

Other factors include the increase in the supply of foreign exchange, improved crude oil production and price, improved investors’ confidence in the Nigerian economy and the financial market, increase in the participation of both the local and foreign investors in the markets and the boost to the economy by the passage of the Petroleum Industry Governance Bill (PIGB).

The sectoral analysis of performance of the equity market in the first five months of 2017 shows that the banking sub-sector recorded the best performance, followed by the Insurance, Industrial and Consumer Goods sub-sectors. The NSE Banking Index gained by 30.70% as at May 31, 2017; the NSE Insurance Index gained 9.77%; the NSE Industrial Index gained 9.15%, while the NSE Consumer Goods Index gained 2.97%.

However, Mustapha Suberu, Lead Research & Strategy at Eczellon Capital Limited argued that: “The hike in monetary policy rate from 12 to 14 per cent would taper the spate of bond issuance as the cost of issuance may become too high for corporates to bear.”

One of those that have taken this position is Wema Bank, which got the Securities and Exchange Commission nod to raise N50 billion.

Tunde Mabawonku, the Chief Finance Officer (CFO) at Wema Bank in a recent chat about the bank’s half year result said: “We are looking at bond issuance in Q3, 2017 to raise tier 2 funds. We are still monitoring the market, depending on the interest rate, we will make that call. If the rate does not reduce, we my not raise the bonds this year, maybe in Q1 2018.

“When treasury bill is selling for 18 and 19 per cent, you will raise bonds at a higher rate and lock down for 7 years.”

Analysts, however believe that the current rally in the equity capital market offers a great incentive for quoted companies to access the market to raise the needed equity capital for their expansion projects.

“As activities increase in the primary market segment of the equity market, the demand for debt capital may drop. Consequently, we expect the interest rate and yields on the fixed income securities to drop,” the FSDH posited.

“The equity market is currently witnessing an uptick in activities. A combination of the change in asset allocation rules for Pension Fund Administrators (PFAs) and opening of a window for investors and exporters has led to a sustained rise in the price of equities. The rising appetite for equities means an equity offer may witness a high level of subscription.

Sola Oni, Stockbroker/CEO, SOFUNIX Investment Limited said, “The Adoption of Rights Issues is a trade off of other options for capital injection such as bank loans, corporate bonds and a host of other financing instruments.

“As economy continues to recover, we shall see more companies raising further funds either by way of rights or public offering.”

He also said, “The emergence of rights issues through the NSE symbolises investor confidence in the company and the capital market. There is no doubt that Nigeria’s economy is on the path of stability as evident in encouraging corporate earnings and instances of market rally. This is a signal that shareholders would pick their rights. It is expected that the trend shall continue in the second half of this year.”

He however expressed cautious optimism, “The key downside to our view lies in the high rate of returns on government securities which are considered secured.

“Should this hold for most part of the second year, it will crowd-out (suppress) private borrowings, and make investments in equities unattractive as well,” he said.